Forecasting
5. Advanced Forecasting
This is not covered in the Unit. However Makridakis et al. contains some reading.
5.1 Box-Jenkins Models
Box-Jenkins ARIMA models provide a powerful approach to time series analysis that pays especial attention to correlation between observations. A detailed discussion is given in Makridakis et al.
The approach requires experience to use successfully and with confidence. The interpretation of results using the Box-Jenkins technique requires proper understanding of the stochastic processes used to model the time series.
A large and careful study carried out by Makridakis seems to show that very often, the simpler techniques described in this unit are just as powerful. There is a good reason for this. The SES, LES and Holt-Winter's Additive methods are equivalent to special (simple) cases of ARIMA models. These simple models tend however to fit many data sets quite well.
5.2 Judgemental Forecasting
Many companies make use of judgemental forecasting techniques which rely on the knowledge of experienced employees and managers. Often this type of forecasting is carried out within the framework of fairly formal and regularly scheduled meetings. Judgemental forecasting can be augmented by the kind of numerical techniques discussed in this unit, and this combined approach has much to commend it.
5.3 Scenario Building
Long term, strategic forecasting moves us into the area of scenario building. This can be useful in allowing a much more long term view to be taken of an organisation's aims objectives. Scenario building thus takes a much broader view than the numerical forecasting that has been the focus of this unit.
The idea of the approach is to look at a number of different scenarios, ranging from best case to worst case situations, and to try to ensure that the actions and strategy of the organisation are sufficiently flexible and resilient to be take advantage of the most likely scenarios, whilst at the same time being able to cope or survive even the most extreme of the scenarios. A good approach is to use the format of a SWOT analysis for structuring and analysing the different scenarios.